How Airlines Might Gouge You in the Future: Personalized Pricing

How can four passengers who booked the same flight, on the same day at the same time, end up paying four different fares? Welcome to the (possible) future of personalized pricing. (Photo: iStock)

Imagine a time in the distant future when you and two of your friends are invited to a wedding in Myrtle Beach, S.C. You log on to your frequent flier account with AnyJet Airlines, and seeing that you have a Greenwich, Conn., zip code, the airline assumes that you’re wealthy and charges you $398 for your fare (unfortunately, despite your tony zip code, you’re actually a modestly paid schoolteacher). At the same time, your friend and fellow wedding invitee who lives in a nearby, less-affluent zip code is also booking the same flight to the same wedding; she’s quoted a lower fare of $310. And when the third member of your trio logs on to purchase his ticket, the airline sees that he’s a frequent business traveler who’s already taken 15 flights this year. It assumes that he’s an easy sale and socks him with a $410 fare.

Welcome to the world of “personalized airfares” or “personalized pricing,” whereby the amount you pay for a flight is no longer just a number based on impersonal factors such as when and where you’re flying or when you booked your ticket. In this possible future, your airfare could be based on who you are, and each fare would be different for everyone — even people booking the same flight at the same time.

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The airlines may soon target passengers with personalized airfares that could take the fun out of booking online. (Photo: iStock)

You may not have to imagine that scenario for much longer; some airline industry insiders believe that personalized airfares are coming. Last week at the annual meeting of the International Air Transport Association (IATA, an airline industry lobbying group), one Spanish airline executive reportedly said it was inevitable that airlines would soon start using personal data to charge some passengers more than others. And while no major air carriers have yet announced such pricing changes, more than a few experts think it’s only a matter of time.

“Absolutely” is Airways News senior analyst Vinay Bhaskara’s answer when asked if personalized pricing is inevitable. “This is something that will enable airlines to increase their revenue.” (At that aforementioned IATA meeting, airlines also announced that they had increased their 2015 profit projection to $29.3 billion, which would be a nice boost from last year’s $19.9 billion profit.)

Would personalized pricing be just another money grab for airlines? Or could it actually be good for air passengers? Experts aren’t exactly optimistic. “I don’t really see the benefits to the consumer,” says travel columnist and author Christopher Elliott. Bhaskara agrees: “At the end of the day, on an aggregate level, airline customers are going to be worse off.”

How would personalized pricing work?

Last year, the U.S. Department of Transportation granted approval for the airline industry to update its computer reservation system through an initiative known as New Distribution Capability (NDC). According to the IATA, a big backer of NDC, the new program will allow airlines and travel agencies to communicate with each other more effectively. As Travel Pulse noted, booking flights will be easier because consumers will be able to do things like select their seats and pay their baggage fees directly through online travel agents such as Orbitz (currently, such sites allow you only to book your flight; if you want additional services like seat selection, you have to be routed to the airline’s website).

In a statement to Yahoo Travel, an IATA spokesperson says: “Airlines are supporting NDC as it gives their passengers the ability (not the requirement) to personalize their air transport experience via the travel agent channel in the same way they can do today via the airline website.”

But with that convenience comes a cost, say critics. They fear NDC could allow airlines to gather and share personal information about you — like, say, your birthday, seat preferences, frequent flier status, and zip code — and use that data to tailor a price just for you. The airlines’ goal under this scenario would be simple: find out which passengers are willing and able to pay more for a ticket, and charge them more than others.

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NDC could make booking flights easier, but that comes at a price. (Photo: iStock)

“For example, someone who lives on Park Avenue [in New York City] and would be willing to shell out $1,500 for a nonstop first-class Delta ticket between Newark and San Francisco, today, might only be paying $700 or $800,” says Bhaskara, “because their higher willingness to pay is not really reflected in the data that Delta has feeding into its pricing system.” That could change under a new data-rich airline pricing system that would allow Delta, or any other airline, to flag that Park Avenue resident as someone with deeper pockets and charge him $1,500, while that $700-$800 fare would go to someone who lived in Queens, N.Y.

“From the airlines’ perspective, they obviously want to match the price it offers a passenger to the price that passenger is willing to pay,” says Bhaskara.

Data downer

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The key to personalized pricing is the data that airlines are able to get from you online. (Photo: iStock)

How will airlines get all the data they could potentially use against you? From you, of course. Maybe via the form you fill out to register with an online travel site. Or maybe via the cookies stored on the Web browser you use to search for airline fares. Or maybe via the airlines’ preferred way to get your info: the frequent flier account you set up on their website. “Because passengers are encouraged to sign up for these loyalty programs, in the name of collecting rewards and free points, it really creates an incentive for passengers to give out their data,“ says Bhaskara. He predicts that “the lure of ‘If I fly Delta seven times, I’ll be able to get a free round-trip domestic ticket’” will be too great for passengers to ignore.

And once airlines have that passenger-provided personal data, they’ll likely use it — and not just to spell your name correctly on your ticket. “All of that information will go into a [virtual] black box, and that’ll help them set the price,” Elliott predicts. “[The airlines] will have an algorithm that says, ‘Oh, you know, Chris is likely to be really desperate for a flight out to Hawaii in January, so let’s send him a $1,500 fare and he’ll probably buy it.”

That possibility has some lawmakers concerned. Recently a group of Senate Democrats wrote the Department of Transportation asking it to investigate this new system for “unfair discriminatory practices” and “serious questions regarding consumer protection and privacy.”

Can I protect myself?

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It might be possible to protect your data from airlines. Good luck with that. (Photo: iStock)

But as anyone who’s done a Web search on herself recently knows, keeping yourself anonymous online isn’t exactly getting easier. “On some level, if you have to fly, you’re going to have to give some of that data to the airlines,” says Bhaskara.

The future of personalized pricing

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What do the air carriers have to say about personalized pricing? Nothing much, as it turns out. (Photo: iStock)

Yahoo Travel reached out to five domestic air carriers — American, Delta, United, Southwest, and Virgin America — to ask about their plans, if any, for personalized pricing. Of the five, only two got back to us: Southwest and United.

Southwest Airlines told Yahoo Travel that it doesn’t discuss pricing issues. But it added: “Southwest uses aggregated, anonymous customer data to promote various products, services and featured offers to customers on multiple channels, devices and sites, including Southwest.com. By observing and analyzing customer behaviors and actions online, we are better equipped to offer our travelers the best rates and experiences possible. Further, we use this intelligence to support the continued evolution of our customer relationships. In addition, we never stop looking for innovative ways to connect people to what’s most important in their lives, through friendly, reliable, low cost air travel. We’ll continue to use data to support — and inform — that mission as long as it can strengthen our connection to our Customers.”

American Airlines told Yahoo Travel that it does not engage in personalized pricing. The airline also denied recent reports that it charges more to users of Apple’s Safari browser.

The IATA also weighed in. “We are unaware of any airline that discriminates against passengers who either do or do not provide personal information,” a spokesperson tells Yahoo Travel. “The US Dept. of Transportation has the authority to pursue enforcement action against any carrier that does so discriminate under their unfair and deceptive practices authority.”

Neither the airlines who responded to our question, nor the ones who didn’t, answered the big question: Would they engage in personalized pricing in the future?

Bhaskara says it’s not an issue now. “The airlines’ pricing algorithms are not smart enough, nor are they written with this in mind,” he says, “so [personalized pricing] is not something that airlines can do today.” Still, that can only last so long. “As computing power improves, and as airlines continue to look for the next way for them to incrementally increase their revenue, this is something that they are going to be doing,” he predicts.

If that’s true, your days of window shopping for airfares could be numbered. Says Elliott: “The problem with all this is if [airlines] start personalizing fares, and there are no more publicly available fares, the fear is that it’s much more difficult to do a price comparison. And if you can’t compare prices, you don’t know if you’re getting a good deal.”

Personalized pricing could have some benefits, especially for those lucky few whose data causes airlines to quote them lower fares. "Airlines might go, ‘This guy’s willing to buy if we drop the price like $20-$25. Let’s just drop that price and get him to do this transaction,’” Bhaskara said. Although Bhaskara predicts that most passengers will end up paying more for flights, he hopes that airlines might use their extra revenue to do things that benefit all fliers, like improving on-time performance, investing in better planes, or expanding in-flight amenities. “There’s two sides to every coin,” he says.

But maybe that kind of optimism is just a way to cope with the inevitable. Airlines very well might be coming for your data; if so, they’ll likely get it and use it however they see fit. “At the end of the day,” says Bhaskara, “as long as I need to fly, I think I’m going to have to live with it.”